June 30, 2017

Markets Today: Getting better

German and Spanish CPIs for June were released overnight – in a limited data schedule – and pointed to a better-than-expected print from tonight’s Eurozone CPI by 0.1% if not 0.2%. That’s added support to the EUR/USD and yields overnight, the Euro this morning at 1.1440.

Euro rate markets are now pricing in a 90% chance of a 10bps hike from the ECB (from its current -0.4% deposit rate) by the middle of next year.  Germany’s CPI for June printed at 0.2%/1.5% (against 0.0%/1.3%) while Spain’s CPI was 1.6% y/y (consensus 1.5%). As a slight dampener, Italy’s (out yesterday) was a 0.2% miss, while France’s is tonight.  German 10y bund yields rose 8.4bps overnight against what’s been a net 3.87bps rise in the US 10y Treasury.

While the Euro has been getting some support, AUD/EUR has been steady-to-higher, AUD/USD testing in the higher 0.76s, assisted with iron ore up again in size overnight.  The benchmark spot price for the red ore rose another $2.38/t to $64.71, up 14.0% so far this week.  Chinese daily traded futures prices for iron ore and steel rebar have also been rising this week, as have base metals, LME copper up another 1.05% and 2.4% for the this week so far.  And so, the AUD sits at the top of the leader board despite the VIX up 1.41 points to 11.44, with equities down on both sides of the Atlantic.

Talk this week of central banks moving to remove monetary accommodation has not hurt the AUD either.  While the RBA is odds on to leave rates steady next week, the language in the Governor’s statement is likely to be tweaked to recognise the continuing improvement in the labour market and economic activity.

Running against the tide of softer equities overnight have been banking stocks.  They have gotten a leg up after essentially passing phase II of the Fed’s stress tests, giving the green light for banks to buy bank stock and pay dividends as they see fit.  The KBW Banks index is up 1.29% with the Dow down 0.78%, the S&P 500 by 0.86% and the Nasdaq by 1.44%.

The CAD has also been supported from the continued reverberations from the more hawkish sounding BoC Governor this week and steadier oil prices.  At the end of last week, the Canadian OIS market was pricing in a 36% chance of a hike at the upcoming 12 July BoC meeting.  That pricing has arced up a tad more overnight to a now 72% probability, tacking on another 5% overnight.

Even the Pound has been getting some support, the new Government facing and getting through three votes overnight over austerity, Brexit and getting the Queen’s speech passed.

Fed President Bullard said overnight that it’s more prudent to announce the balance sheet adjustment at a press conference, making September more likely.  That’s the way the market’s been thinking.

Coming up

The main item on the local market’s schedule today is the Japanese barrage of releases, initial focus on the national May CPI at 9.30.  The market is expecting headline and core inflation annual rates to tick higher by 0.1%, headline inflation up to 0.5%.  It’s a similar expectation for Tokyo’s CPI for June, expected to be 0.3%.

Also at 9.30 is the May labour market report with a steady and low unemployment rate of 2.8% the consensus.  Overall household spending growth for May is expected to be still marginally negative at -0.7% after -1.4% to April.  It’s been mostly running at a similar rate of contraction apart from pre-consumption tax bring-forwards, and not surprising given the contraction in Japan’s population and deflation.

Then, the market will be interested in whether there are any key takeaways from the May industrial production report, expected to decline 3.0% m/m, payback after +4.0% in April.  To be absolutely complete, Japan also has vehicle production, housing starts and construction orders data for May this afternoon at 15.00 AEDT.

The AUD market will be more fixated on China’s official PMIs for June at 11.00 AEST.  The key Manufacturing index is expected to ease to 51.0 from 51.2, right in its average for the past year. Will that index – and the counterpart Non-manufacturing index (L: 54.5; no consensus pick) – play to the gradual easing of growth story or to a more upbeat tone evident in markets like iron ore this week?

There’s also RBA Credit for May, steady modest growth of 0.4% m/m our (and the market’s pick) with continuing interest especially in the investor housing component in the facing of higher financing constraints.

Then it’ll be focus on key inflation data out of the Eurozone and the US as the main data watch-points.  There’s the EZ CPI for June first then later the US PCE deflators for May, after the soft May CPI. There will also be interest in the PCE report for what it says about the state of personal spending as a further update on how US Q2 GDPNow is travelling. The current estimate is 2.9%.  US Q1 GDP was revised up from 1.2% to 1.4% overnight.  The Chicago PMI for June (the national Manufacturing ISM is out Monday) is also out and there is the late month estimate from the UoM Consumer Sentiment survey.


On global stock markets, the S&P 500 was -0.86%. Bond markets saw US 10-years +3.87bp to 2.27%. In commodities, Brent crude oil -0.06% to $47.28, gold-0.2% to $1,246, iron ore +3.8% to $64.71, steam coal +0.4% to $80.95, met. coal +0.0% to $146.50. AUD is at 0.7684 and the range since yesterday 5pm Sydney time is 0.7635 to 0.7686.

Good luck.

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